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Is my trade or business a “Specified Service Trade or Business” and is my taxable income more than the amount that permits me to have a full 20% Section 199A deduction?

Internal Revenue Code Section 199A was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), and slightly modified in 2018. This provision provides a tax deduction of up to 20% of the net income that a taxpayer receives from an active trade or business, which may include rental real estate and professional practice income other than wages.

Health care, legal, accounting, professional entertainment, athletes and certain other professionals and professional business owners are not able to deduct dividend and profit distributions if their income exceeds the now CPI modified limits of $160,700 in 2019 for a single person, or $321,400 in 2019 for a married couple filing jointly.  The deduction is reduced on a sliding scale so that there is complete loss when a single person has taxable income exceeding $210,700 or a married couple filing jointly has income exceeding $421,400, or a sliding scale for income in-between.

Many professionals can cause their businesses to purchase equipment or even commercial building components, like a new roof, that will bring income down by being fully and completely depreciable in the year of acquisition, and others may allow lower income family members who work in the practice or business to have higher earnings, within reason, to reduce the owner’s earnings when this is supportable.

This is a complicated area of tax law. It is strongly recommended that a tax lawyer be consulted who is familiar with these rules.